A Heady Win for State Street

When Bank of New York Mellon (NYSE: BK) reported fourth-quarter earnings yesterday, its slight miss on earnings caused a drop in its stock value. But it wasn't alone. State Street's (NYSE: STT) shares also took a hit, because investors know that similar pressures are facing both big custody banks.

Yesterday's headwinds turned into a breath of fresh air today, however, as State Street delivered sparkly Q4 results, and a promise of more expense-side savings for the coming year.

Finishing up the year in good shapeState Street had lots of good news wrapped up in its report, such as a 6% hike in revenues year over year, and a 19% gain in adjusted earnings per share. Net interest revenue increased somewhat from last year, while the important net interest margin (on an adjusted basis) decreased only slightly from last year – by four basis points – compared with fellow BNY Mellon, which presided over a NIM drop of 18 bps .

Another bright spot was processing fees, which jumped nearly 92% from the year-ago quarter. The bank noted that some of this big change was due to negative fair-value adjustments made in late 2011 in fixed-income trading, but part of the increase may be due to the new fee system introduced last quarter for institutional investors. In addition, assets under custody grew by nearly 12%, compared to BNY Mellon's increase of only 9%.

Trading revenue dropped by 11% from last year, driven by a 21% drop in foreign exchange trading revenue -- though both were up slightly from the third quarter of 2012.

A common banking problem: expenses need tamingOne area that needs work is the expense column. State Street has been trying to rein in costs for some time, with limited results. A disappointing second-quarter report last year prompted layoffs of approximately 850 staff in an effort to contain escalating costs, which showed an increase from last year of nearly 5%. State Street has noted in regulatory filings that it plans further staff reductions, this time, to the tune of 630 during the current year.

State Street is not alone in its efforts at expense reduction. Both Bank of America (NYSE: BAC) , through its now-famous Project New BAC, and Citigroup (NYSE: C) , which recently went through a very public management shakeup, are also laying off workers. Citi recently announced its plan to sever 11,000 employees over an unspecified span of time, while B of A is apparently still on track to shed a total of 30,000 workers over the course of its streamlining program.

For State Street, news of its plans for further cost reductions will surely make investors smile. With fee revenue up, and foreign markets looking a little perkier, the recent rally in the company's stock looks like it may last a good while longer.

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